- The due diligence analysis is one of the most important steps in a transaction.
- Romania failed to keep its budget deficit in check, putting pressure on tax collection and lawmakers to reform tax legislation and administration alike.
- The need to increase digitalisation at the level of the Romanian tax authorities became key.
- Even so, conventional tax risks such as lack of supporting documentation, transfer pricing, or requalification in the payroll area remain the key driver for most tax audits.
Within an ever-changing landscape, it has been expected that buyers exert caution following numerous global disruptions, from geopolitical conflicts, inflation, and high-interest rates, to labour shortages and changes in consumer behaviour, multiple and broad-ranging tax reforms, the push towards increased tax and financial transparency as well as the challenges posed by the sustainability agenda. However, according to our latest report, Investing in CEE: Inbound M&A report 2023/2024, dealmaking in Central and Eastern Europe (CEE) held up relatively well, with the number of transactions reaching 1,097.
At the local level, the total value of transactions nearly doubled compared to 2022, reaching approximately 4.1 billion euros. The largest deal was the acquisition of Profi Rom Food by Ahold Delhaize, a major player in the global food retail market, from the private equity fund Mid Europa Partners, for €1.3bn. Now, Romania ranks among the top four M&A markets in the region in terms of deal volume, gaining more and more visibility to international investors as well as developing a strong local investor base.
Răzvan Butucaru
Partner, Financial Services & Advisory Leader
The importance of an evolving tax environment in performing a transaction
Generally, a buyer focuses in a transaction on the fundamentals of the business and its financial performance, looking to understand how the business intended to be acquired has operated up until the time of the acquisition. Although sometimes the tax issues take a backseat in the equation of the transaction, especially in smaller transactions, the practice demonstrates more often than not that tax issues discovered after the acquisition bring challenges in managing risk and can even affect the terms. In this respect, a tax due diligence exercise is carried out as part of the transaction.
Additionally, in the current changing tax landscape where new layers of complexity are being added to transactions, a tax due diligence exercise carried out as part of the transaction is more important as it can go beyond the mere identification of historical tax risks and can bring insight regarding the resilience of the Target’s business in the context of multiple tax reforms and the need of accelerated digitalisation of the tax function.
Romania continues to find itself challenged with a budget deficit and inefficient tax collection, hence the continued changes in the tax legislation. In this respect, there is a growing consensus among policymakers that increased digitalisation of the Romanian tax authorities is imperative and significant steps have been taken in this respect, especially in terms of SAF-T reporting, e-Invoicing, and e-Transport implementation.
Lucian Dumitru
Partner, Tax
While the urgency of digitalisation for tax collection is widely acknowledged, the road to implementation is not without its pitfalls, ranging from technological constraints to bureaucratic issues within the public sector. This by itself means additional uncertainty for taxpayers in terms of implementation of such reporting requirements and thus, a lack of clarity for companies to accurately estimate the costs of adhering to the new digital framework for tax compliance purposes.
Motivated sellers need to be proactive when trying to secure the best deal possible. Justifying to a potential buyer the price solicited in a transaction means demonstrating the value of the business in question, which should not be limited only to the business potential but also to the quality of the organisation running the business. In this respect, among others, the tax administration function becomes, in our experience, more and more important. This means both parties start putting more emphasis on the status of digitalisation of the tax function of the Target during the due diligence process, namely what is the status of implementation, what tools it uses or intends to implement, and whether they would provide for a compliant and efficient internal tax compliance after acquisition.
Lucian adds: "In addition, developments at the EU level such as the proposed Directive laying down rules to prevent the misuse of “shell companies” as conduit vehicles to take advantage of withholding tax exemptions under the Parent-Subsidiary Directive and Interest and Royalties Directive and Double Tax Treaties will generate additional layers of complexity in structuring acquisitions, as investors would need to evaluate their existing group structures in anticipation to these measures, and at the same time satisfy their buy-side needs going further."
Consequently, effective tax structuring is the most proactive approach toward managing the financial affairs and goals of the stakeholders, whilst at the same time remaining compliant with the developments of the tax environment.
Key tax areas and challenges in a transaction
While digitalisation of the Romanian tax authorities is underway, on the downside, Romania’s budget deficit is also prompting more aggressive tax audits looming on the horizon. Therefore, topics prone to interpretation are over scrutinised during tax audits, with a common practice of challenging the substance of transactions performed by taxpayers or the classic burden of proof befalling on taxpayers in respect of the nature and business reasoning behind every expense affecting the tax base.
Cristian Botezatu
Senior Manager, Tax
Because of the potential magnitude of such outcomes, it is critical for sellers and buyers alike to identify and address key issues the Targets would face and discuss them early on, with the purpose of streamlining the process. For buyers, this must include the proper due diligence to assess potential tax risks. Sellers on the other hand are urged to take a more proactive approach, through preliminary tax reviews during which the aim is to uncover potential issues that might appear in the buy-side due diligence process. Therefore, giving the opportunity to begin the process of resolving issues identified before the Transaction takes place and level the playing field during negotiation with a potential buyer.
Buyers can use several mechanisms to ensure their protection against potential tax risks that may materialise after the closing of the Transaction, such as: negotiating specific terms, introducing safeguards and conditions precedent to closing, and adjusting the transaction price. However, it depends on both parties’ agreement in this respect.
Below, we highlight some of the most discussed tax-related topics that Mazars has identified through transaction assistance projects:
- Actions to be taken prior to the Closing of the transaction
The investigative processes carried out related to tax, but not only, may result in the identification of various tax-related issues. They can span from mere tax compliance discrepancies or tax consequences arising from measures agreed to be taken by the seller prior to Closing (legal or otherwise). Parties would need to carefully evaluate each item and include the proper safeguards in the transaction documents, from the proper wording of each action, steps to be carried out, and responsible parties, to potential tax consequences and price adjustments resulting thereof.
Transactions usually imply costs with third-party advisors, such as tax, among others, financial, legal advisors, and technical advisors, concerning preparatory or post-closing activities, as well as success fees. One can often see that such costs are born or agreed upon with the advisor to be incurred by the Target and, depending on the specific activities carried out, these may be deemed shareholder costs. Therefore, there is a need for parties to identify such costs, as in most cases they could be misidentified or interconnected with the expenses incurred in the normal course of business. Alternatives could involve carving out such costs by recharging them to the economic beneficiaries (the sellers) if incurred in the past or assigning future similar obligations to the sellers.
- Periods open for tax audits
Visibility regarding the applicable statute of limitation for tax audits provides a buyer with an understanding of the extent to which historical tax risks may materialise after the acquisition. Attention should be given as well to potential periods of suspension or periods for which the statute of limitation has been restarted as an effect of rectifying tax returns. The history of the tax inspections should also be analysed from the perspective of the risk areas reported by the Romanian tax authorities and the degree of subsequent compliance, changes in practices, etc. of the Target. In the absence of measures to correct and rectify the elements that led to the issues identified during a tax audit, one cannot exclude the possibility for the same risk areas to be subject to a future tax audit and adjustment by the tax authorities. Investors should pay attention to this item when addressing the potential time limitations for tax claims towards the seller(s).
- Potential reclassification for payroll tax purposes
This can imply the requalification of activities carried out by self-employed individuals to the benefit of the acquired company, from independent activities to dependent ones, which may generate additional payroll payment obligations for the Target as deemed employer. These cases have an increased frequency depending on the industry, particularly in IT services, medical/clinical services, or even engineering. Buyers are quick to include specific safeguards in this respect, however, they should also consider the post-closing consequences of such arrangements. On the downside, accommodating post-closing additional costs with payroll taxes may have a significant impact on the enterprise valuation.
- Transactions with related parties
Difficulties can translate into significant costs and effort after the acquisition process if the Target does not have complete and compliant transfer pricing documentation. Furthermore, there may be practical difficulties in accessing or obtaining past information from the seller(s) for the transactions with related parties, which makes the process of preparing the said required documentation more challenging. Based on these considerations, it is recommended that the preparation of the transfer pricing documentation for the pre-transaction periods remains the responsibility of the seller(s), or at the very least that the transaction documents provide the obligation of the latter to support this process post-closing, especially during a tax audit.
- Deductibility of services expenses and related justifying documentation
This topic remains an ongoing area of interest for tax inspectors, especially those acquisition acquired from related parties. Like the transfer pricing documentation, the process of obtaining supporting documentation for services acquired by the Target from group companies during periods prior to the transaction, can be equally laborious and involves additional resources from the company and even the buyer. Therefore, the recommendation is for this type of expense to be documented in advance by the seller(s), as part of the transaction to provide comfort regarding potential tax risks in tax deductibility for corporate and VAT purposes.
"Also, many other tax areas may be of significant interest to the Romanian tax authorities, depending on the specifics of the business and industry sector in which the Target operates. It is therefore necessary for prior identification of these issues, together with their quantification and negotiation of the impact on the transaction price, and this should represent an important step in the acquisition process." added Cristian.
Regardless of the size of the company acquired or the industry in which it operates, the tax issues and how they are addressed in the context of the transaction will frequently be of interest, with a significant impact on the terms and price of the transaction, as well as the effective tax costs post-closing.
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About Mazars
Mazars is an internationally integrated partnership, specialising in audit, accountancy, advisory, tax and legal services*. Operating in over 100 countries and territories around the world, we draw on the expertise of more than 50,000 professionals – 33,000+ in Mazars’ integrated partnership and 17,000+ via the Mazars North America Alliance – to assist clients of all sizes at every stage in their development.
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About Mazars in Romania
In Romania, Mazars has 29 years of experience in audit, tax, financial advisory, outsourcing, consulting, and sustainability. We empower over 370 people to deliver our promise to clients with confidence.
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